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The regulator’s trade-off: Bank supervision vs. minimum capital

  • Buck, Florian
  • Schliephake, Eva
Registered author(s):

    We develop a simple model of banking regulation with two policy instruments: minimum capital requirements and the supervision of domestic banks. The regulator faces a trade-off: high capital requirements cause a drop in the banks’ profitability, whereas strict supervision reduces the scope of intermediation and is costly for taxpayers. We show that a mix of both instruments minimises the costs of preventing the collapse of financial intermediation. Once we allow for cross-border banking, the optimal policy is not feasible. If domestic supervisory effort is not observable, our model predicts a race to the bottom in capital requirement regulation. Therefore, countries are better off by harmonising regulation on an international standard.

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    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 37 (2013)
    Issue (Month): 11 ()
    Pages: 4584-4598

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    Handle: RePEc:eee:jbfina:v:37:y:2013:i:11:p:4584-4598
    Contact details of provider: Web page: http://www.elsevier.com/locate/jbf

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